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TMI Blog1986 (2) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... des these three shops, there were, however, two other shops of which the licences were not in the names of all the three partners. The Income-tax Officer held that the assessee-firm had contravened the provisions of the Rajasthan Excise Act, 1950 (No. XXIV of 1950) (which will for the sake of brevity hereinafter be referred to as " the Excise Act "), and also the licence issued thereunder to the assessee. He also found that the assessee had not filed the application for registration in Form No.11A which was the proper form and instead, application for continuation has been filed in Form No. 12 on June 25, 1973. He, therefore, vide his order dated February 21, 1976, passed under section 185 of the Income-tax Act, 1961 (Act No. XLIII of 1961) (" the Act " herein), made the assessment of the assessee-firm in the status of an unregistered firm. An appeal was filed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the view that the filing of the application for continuation of registration in Form No. 12 instead of Form No.11A for registration constituted an irregularity which could be cured. By his order dated July 20, 1976, he directed the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed by him. In that firm, the partners were Rooplal, Khemchand and Ladharam. The aforesaid firm carried on the business for the assessment years 1971-72 and 1972-73 under the licence granted in the name of Rooplal. No permission in writing was obtained by Rooplal from the excise authorities for carrying on liquor business in partnership with others. Now, we may notice the relevant provisions contained in the Rules. Chapter VII-A of the Rules deals with licence under the guarantee system. According to rule 67A, licence for retail shop of country liquor under the guarantee system can be granted to persons guaranteeing to draw from Government warehouse and sell in a financial year or part thereof country liquor of a specified value which is called the amount of guarantee. The licences under the guarantee system can be granted: 1. by inviting tenders, or 2. by auction, or 3. by negotiation. When the licence under the guarantee system is granted by inviting tenders, the amount of the tender accepted for the grant of license is payable by the licensee. The most important rule for our purpose is rule 72B relating to transfer of a licence. It will be relevant to read rule 72B, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled that the essentials for the formation of partnership are: 1. that there should be an agreement between the persons forming the partnership, 2. that the agreement should be for carrying on business, 3. that the profits or losses of the business are to be divided, and 4. that all the partners should be equally engaged in the business or one of them should act on behalf of the others. It has not been urged by learned counsel for the Revenue that the partnership formed by Rooplal and others was not in accordance with law. The Income-tax Officer was of the opinion that when Rooplal and others have formed a partnership to carry on the business mentioned in the licence, it amounted to a transfer of the licence in favour of the other partners, for, it was prohibited under the Rules. In disagreement with the view taken by the Income-tax Officer, the Appellate Assistant Commissioner opined that there was no contravention of any of the provisions of the Excise Act or the Rules. He, therefore, held that a valid partnership was formed by Rooplal with others. In view of this conclusion, following his earlier decision, he directed the Income-tax Officer to grant registration. On app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not Prohibit the holder from entering into Partnership by the holder of the licence i it merely Provides that the licence shall not be subject or transferred. Since there is no Prohibition against entry by the holder of the licence into a Partnership, the question whether the Partnership was illegal does not arise. The firm was entitled on that account to registration." (underlining ours) It is thus clear from Jer & Co.'s case [1971] 79 ITR 546 (SC) that if the licence does not provide prohibition from entering into partnership by the person who holds the licence and that it merely provides that the licence shall not be transferred, then, there is no prohibition against entering into partnership by the holder of the licence and, in such circumstances, there will be no question of the partnership being illegal. Before the Full Bench of the Allahabad High Court in P. C. Kapoor v. CIT [1973] 90 ITR 172, a somewhat similar question to that with which we are concerned in this reference arose. In that case, a licence was obtained by D.P. and B.P. for the retail sale of country liquor. They formed a partnership with five others under a partnership deed dated April 9, 1961. That partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal at the inception did not become illegal because it exploited a licence which could not have been transferred to it, or, for the matter of that, it transacted rice business without obtaining a requisite licence (in its name). On a reference, at the instance of the Revenue, the Calcutta High Court held that the provisions of the Control Order did not prohibit entering into a partnership or make the formation of a partnership illegal. Reliance was placed on Jer & Co.'s case [1971] 79 ITR 546 (SC), CIT v. Gian Chand and Co. [1973] 87 ITR 113 (P & H) and Kapoor's case [1973] 90 ITR 172 (All) [FB]. Now, we advert to the decisions relied on by learned counsel for the Revenue. The first authority to which reference may be made is Union Tobacco Co.'s case [1961] 41 ITR 115 (Ker). In that case, some partners obtained licences for dealing in tobacco. A partnership was formed to exploit the licences. The question arose whether the partnership was legal. In that case, rights under the licences were transferred in contravention of the rules contained in the notification. A finding was recorded that as the partnership merely amounted to such contract, it cannot be registered. Umacharan Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enter into a partnership for the working of such privilege in any way or manner without the written permission of the Collector, which shall be endorsed on the licence. In those circumstances, the question cropped up whether the partnership was illegal and the firm was consequently not entitled to registration under the Income-tax Act. It was ruled by the Madhya Pradesh High Court that in the Excise Rules, the prohibition from entering into partnership regarding the working of the privilege had been made absolute and was couched in wide terms and that it could not be truncated simply because the partners who did not have the privilege in their names were not taking any active part in the working of the privilege. It was found that the partnership in the liquor shops was illegal and could not be registered. But the partnership with regard to the running of the hotel was a valid partnership and could be registered. It is clear that there was a condition prohibiting entering into partnership regarding the working of the privilege. In CIT v. Hardit Singh [1979] 120 ITR 289 (P & H), while considering the provisions of the Punjab Excise Act, 1914, and the Punjab Liquor Licence Rules, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which carried on the business. It was held that there is no illegality in the partnership and the firm is entitled to registration under section 26A of the old Act. The learned judges followed Umacharan's case [1959] 37 ITR 271 (SC), CIT v. K. C. S. Reddy [1960] 38 ITR 560 (Pat), Prakash Ram Gupta's case [1969] 72 ITR 366 (Pat), CIT v. N. C. Mandal & Co. [1969] 72 ITR 769 (Pat) and Md. Warasat Hussain's case [1971] 82 ITR 718 (Pat). In respect of Umacharan Shaw's case [1959] 37 ITR 271 (SC), it was stated that the Supreme Court has laid down therein that a partnership firm could carry on the business of selling foreign liquor though the licences were held by individual members constituting the partnership with regard to different shops. It was farther stated that the Supreme Court made reference to section 42(1)(a) of the Bengal Excise Act and held that such a partnership could not be said to be illegal on account of any contravention of the provisions. The authorities that have been referred to by learned counsel for the Revenue cannot be availed of by him for, in those cases, after construing the relevant provisions of the Act or the Rules or the conditions, it was inferred that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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